Manufacturing is critical to the UK economy, making up over 10% of GDP, a greater share than either financial services or construction, as well as almost half of exports. Perhaps no other sector depends so strongly on frictionless trade, both in terms of the tariff free movement of goods and regulatory alignment. Since the UK voted to leave the EU in June 2016, UK manufacturing hasmade some adjustments, but it’s difficult to see any real effects at this stage. There has certainly been a great deal of concern expressed by manufacturing companies, including some high-profile pull-outs, but when you look at the hard data it’s difficult to find any evidence for real impact. This may be expected of course, Brexit still hasn’t happened yet. When you scratch a little deeper, there are major causes for concern in UK manufacturing.
Employment data, published by the Office for National Statistics (ONS), shows a dramatic decline in the number of people employed in manufacturing over the last 20 years. In 1997, the sector employed almost 4.4 million people, today that figure has dropped to barely over 3 million. However, this decline primarily took place before 2008 and actually slowed immediately after the financial crisis. Between January 2009 and the EU referendum in 2016, manufacturing employment saw a modest increase. Although it did go into a slight decline again after the referendum, this was very moderate compared to the dramatic drops of the previous decades, and in the last 12 months most of the lost jobs have actually been replaced. As far as employment is concerned, there has been no noticeable impact on manufacturing as a whole.
Announcements of pull-outs by large multi-national manufacturers are not reflected in the employment data, not least because they haven’t actually happened yet. A string of automotive companies have announced that they are either closing or scaling back UK factories over the next 2 years. These include Ford closing their Bridgend plant, with 1,500 job loses expected, Honda closing Swindon with 3,500 jobs loses due in 2021, Nissan cancelling X-Trail production in Sunderland, putting 7,000 jobs at risk, and Jaguar Land Rover planning to cut 4,500 jobs. There are two important things to note about these announcements. On the negative side, they may be a sign of what’s in store for UK manufacturing over the next few years. More positively, they only amount to 0.5% of the total jobs in UK manufacturing. Of course, it’s not clear that these cutbacks have anything to do with Brexit.
Looking at turnover generated by manufacturing presents a similar picture. UK manufacturing has largely kept pace with inflation, recovering quickly from a small dip in output after the financial crisis of 2008. The reduction in the workforce does not seem to have had a negative impact on output. It is striking that there is no noticeable change in the overall trend following the result of the Brexit referendum in 2008.As with the employment data, it is important to note that Brexit hasn’t happened yet and this data doesn’t necessarily mean that there is nothing to worry about. What it does show is that there has been no impact on turnover so far.
Although turnover does not appear to have been impacted by Brexit preparations, this doesn’t tell us what’s happened to profits. Although Brexit hasn’t actually happened yet, many businesses report that uncertainty and the need to prepare has significantly affected profit. A recent survey carried out by Made UK, the association for UK manufacturers, found that this has reduced profits for 64% of manufacturers. Over half of UK manufacturers have already experienced a noticeably negative change in EU customer or supplier relationships. Orders are also now starting to fall, over the last four months export orders have fallen by 8% and domestic order by 11%.
With uncertainties now causing significant impacts in terms of customer and supplier relationships and orders, we still don’t know what kind of Brexit to actually expect, or when it is going to happen. The major concerns of industry are that frictionless trade and regulatory alignment with the EU continues, that access to skilled workers is maintained, and that any changes are properly planned.
Whether or not the UK plays a political role in the EU is really of no importance to industry. A Brexit where the UK leave the EU but maintain freedom of movement and regulatory alignment might not have much impact on UK manufacturing, but it’s hard to see what the point of it would be. This type of Norway-type arrangement would mean the UK becoming a rule-taker that is unable to have much control over the regulations it is aligned to. This would hardly satisfy the nationalist call to ‘take back control’ that drove the pro-Leave campaign. The UK’sminority government is currently pushing for a much harder version of Brexit that would appease such voices, at the expense of severe disruptions to trade. The worst possible outcome of this could be a no-deal Brexit.
If the UK crashes out of the EU without any deal, then not only would its trade agreements with the EU end, it would no longer have agreements, made through the EU, with over 70 additional countries. In this eventuality, the UK intends to create a temporary zero-tariff period. Because of WTO rules, this would have to be applied uniformly to imports from any country in the world. The UK wouldn’t be allowed to accept EU goods without tariffs and then apply tariffs on goods from other countries. At the same time, the EU would be required, under WTO rules, to apply the same tariffs to UK goods as it does to any other third country. This would mean that UK goods entering the EU would have tariffs averaging 5.3% but higher for key manufactured goods such as automotive at 10%. This imbalance of tariff arrangements would put UK manufacturers at a severe disadvantage. The UK government’s plan for zero tariffs is, in effect, prioritizing consumer prices over the competitiveness of UK industry.
Assuming that it is possible to negotiate a trade deal with the EU that removes these tariff barriers to trade, the substantial issues of non-tariff barriers and regulatory alignment remain. I’ll go into more detail on what these might mean for UK manufacturing in my next article on this topic, when hopefully we will have a clearer idea of the direction the UK is going to take.